The Constellation Software (TSX:CSU) 10-year stock chart is a thing of beauty. It’s pretty much a straight line up and to the right, with just a couple of blemishes thrown in.
Naturally, this translates into massive returns. A $10,000 investment made in the stock back in December, 2009, back when shares traded at the $40 range, is now worth $413,119 assuming you reinvested your dividends into more Constellation shares along the way.
No, that’s not a typo. The stock really has returned 4,029.96% over the last decade, or 45.08% per year — the best performance of any stock on the entire Toronto Stock Exchange.
If you look a little closer at that 10-year chart, you’ll see the stock stumbling ever so slightly in both late 2015 to early 2016, when it fell a little more than 20%, and in the second half of 2018, when it declined by more than 25%. Obviously hindsight is 20/20, but both these situations turned out to be fantastic buying opportunities.
For just the third time in a decade, Constellation shares are on sale today. Let’s take a closer look at why you need to take advantage of this sale and add the stock to your portfolio.
The opportunity
After rising pretty steadily after hitting a new low back in December, 2018, Constellation shares recently peaked at approximately $1,440 each.
It’s easy to see why investors were bullish. Mark Leonard, Constellation’s CEO and the man some call the Warren Buffett of software, continued to lead his team to great results.
Quarterly revenue rose by 15% on a year-over-year basis, on the back of numerous acquisitions. Cash flows from operations went up a similar amount, increasing 14%.
Leonard’s strategy is simple. He and his team scour every corner of the software market looking for niche players without much growth potential, the kinds of companies nobody else wants. He’s a disciplined buyer who’s always looking for at least a 30% return on capital invested.
Constellation has been deploying this strategy for more than 10 years now, and the company is still relatively small. Analysts predict it’ll do just US$3.5 billion in revenue in 2019, with that number increasing to US$4.1 billion in 2020. There’s still plenty of potential to grow the company.
Despite all this potential, the advantages of having a masterful capital allocator like Leonard running the show, and a still-rosy outlook, Constellation shares have cratered over the past few weeks. As I type this, the stock is all the way down to $1,266, a decline of approximately 12%.
But is it overvalued?
I won’t sugarcoat it. Even after this pullback, Constellation is not a cheap stock. It’s still extremely expensive.
According to the TMX Money website, Constellation shares trade at a trailing P/E ratio of 47 times, which is high even for a growth stock.
Bulls will argue there are three big reasons the company deserves the valuation. The first is Mark Leonard, who has proven many times he’s a great acquirer.
Second, Constellation is a great business with high net margins and obvious barriers to entry. Finally, the stock has potential to grow the bottom line by 20% per year for years to come.
That kind of combination doesn’t come by very often. No wonder the stock is so expensive.
Bears have a different opinion. They say the stock is just too expensive, and you can find companies with a more suitable valuation that offer similar growth.
Some bears also argue that Leonard’s reputation will eventually get the best of him, and owners will simply choose to sell to someone else.
The bottom line
If you’re a believer in Mark Leonard and the story being built by Constellation right now, then today is a terrific buying opportunity. There aren’t many chances to buy this stock at a discount, so take advantage of it.
